Tucker Enterprises has $100 000 worth of debt financing and $200 000 in equity financing.This year it paid $8000 in interest on its debt and paid $8000 in dividends to shareholders.Its tax rate is 25%.This suggests which of the following?

Question

Tucker Enterprises has $100 000 worth of debt financing and $200 000 in equity financing.This year it paid $8000 in interest on its debt and paid $8000 in dividends to shareholders.Its tax rate is 25%.This suggests which of the following?

Quizplus · Accepted Answer

Interest payments are tax-deductible, so Tucker Enterprises can reduce its taxable income by the amount of interest paid, which in this case is $8000. Thus, the company will pay $2000 less in taxes (25% of $8000). Dividend payments are not tax-deductible, so they will not affect the company's taxes or taxable income.

Tucker Enterprises Has $100 000 Worth of Debt Financing and $200 000